By John Richardson
The start of the next dip in what this blog has long thought would be a double-dip economic crisis looks as if it could have begun.
If not now, it’s going to happen at some point because of major global imbalances.
What’s worrying right now is the combination of:
*Potentially weaker demand from Chinas as credit is tightened due to inflation concerns
*Government debt crises in Europe
*More negative than positive news on employment from the US
Further evidence of China’s inflation challenge has emerged with the announcement that Jiangsu province, in eastern China, is to raise its minimum wage by at least 12% . Other major exporting and manufacturing provinces are expected to follow.
Concerns over Greece’s ability to fund its budget deficit – along with other Euro zone countries such as Spain and Portugal – has been the main reason for the sharp fall in global equity and commodity markets over the last two weeks, according to the Financial Times.
Darius Kowalcyk, chief investment strategist at SJC Markets in Hong Kong, was quoted in the FT as saying that contagion thinking was behind the sell-off as concerns grew over a new global downturn.
“Asia continues to be so dependent on exports to the developed world, that if these developed market governments cannot fund their stimulus spending, then they will not grow and Asian exports will suffer,” he added.
The across-the-broad collapse in markets is being partly blamed on exchange-traded funds – for example, the US dollar/crude funds. These operate via highly complex super-fast computer programmes that can move hundreds of millions of dollars within a fraction of a second.
The greenback has rallied as a shelter in the new economic storm, forcing crude down – revealing the lie that the rebound in oil was mainly due to stronger macroeconomic fundamentals.
Last year was a story of huge global economic stimulus with little or no focus on when this spending would have to be reduced.
“It seems the market (now) wants to accelerate an issue (winding down this spending) that the authorities were hoping that time would heal,” Jim Reid, strategist at Deutsche Bank was quoted as saying in the FT.
A McKinsey report on Western debt – released last month – warned that investors might worry about public debt before private sector deleveraging had been completed.
The result could be a cut back in public debt before the private sector had completed its own reduction, damaging growth by far more than if an orderly wind-down took place, the report added.
Even with an orderly wind-down it could take a further six-to-seven years for the West to bring debt down to sustainable levels, said the study.
Worries over public debt in the Euro zone has caused a sharp fall in the shares of European banks with big exposure to weaker economies such as Greece, Spain, Portugal – and also Ireland and the UK (see table below from the European Commission, via The Economist, of the world’s biggest national debtors measured as percentage of GDP).
The full article in The Economist where this table was drawn from is well worth a read.
Logically, therefore these European banks might have to tighten lending – stifling finance to companies, particularly the medium and small-sized.
As for US unemployment, the overall jobless rate had fallen to 9.7% from 10% in January, with the retail and manufacturing sectors gaining 42,000 and 11,000 new jobs respectively.
But 8.4m jobs have been lost since the crisis began, 1m higher than previously estimated.
And most disturbingly of all, long-term unemployment – those without a job for 27 weeks – jumped to 6.3m from 2.7m a year earlier in January!!!
We’ll be looking at the effect that these macro issues will have on chemicals over the next week or so.